Israel's Nova helps ensure chips do their best

Analysts like prospects for maker of chip-process-control systems

RobertDaniel

TEL AVIV (MarketWatch) — How small is small and how accurate is accurate? Nova Measuring Instruments Ltd. will tell you. And securities analysts say its stock price might yet get bigger.

Nova Measuring Instruments Ltd.

Nova Measuring Instruments Ltd.'s T600 system.

The Ness Tziona, Israel, company, employing about 300, makes measurement and process-control systems to ensure accuracy within the semiconductor-manufacturing process. These systems and accompanying software are either stand-alone equipment or integrated into the process.

Put simply, Nova’s technology helps ensure that computer chips do exactly what they’re designed to do.

On Feb. 15, Nova reported fourth-quarter net income fell 36%, to 18 cents a share from the prior year’s 28 cents. The latest adjusted profit, which excluded a tax benefit and stock-based compensation, was 11 cents.

Quarterly revenue declined 29% to $19.2 million. But 2011 revenue of $102.8 million marked the first time that the annual top line exceeded the century mark for the company
NVMI, -0.35%

President and Chief Executive Gabi Seligsohn said then in an accompanying statement that order bookings accelerated through the fourth quarter and that the trend early in the first quarter was positive. On Monday, the company said it received a total of $12 million of orders for equipment from a number of major chip foundries.

Three years ago, a share of Nova’s stock could be had for a few dimes. The shares clawed their way to $11.79 early last May and have been on a rough ride since, pulling back to $5 in September, bouncing above $9 in mid-February and settling at $8.35 on Wednesday.

Complex, meticulous process

Chipmaking is an enormously complex process, involving repeated layering and distribution of materials on ever-shrinking spaces to meet the technology demands of, say, smartphones, tablet computers and cloud-computing servers for delivery of services over the Net, Seligsohn told MarketWatch.

If “a certain line must be 10 nanometers, plus or minus 2 nanometers,” the producer “must make sure that at that specific manufacturing step that line is exactly in that range,” Seligsohn says.

The slightest deviation that goes undetected at one step can multiply on itself over successive steps and wreck a potentially huge batch of chips. “An accumulated shift in the process is an accumulated error,” he says.

Chip manufacturers “want to know every detail of every contour,” he says. “Every subtle change can mean a change at the end of the manufacturing process. The tiniest change can create a situation where your chip is not going to perform.”

This is where Nova’s systems come in: measuring as chips go into and emerge from the manufacturing process. The assessments are done at high speed so as not to impede the process, and customers can tweak the process parameters on the fly to ensure accuracy.

Ahead of expectations

The fourth quarter’s earnings declines notwithstanding, the results beat the estimate of Edwin Mok, analyst at Needham & Co. He was looking for an adjusted profit of 2 cents on $17.9 million of revenue.

In recent reports, Mok reiterated a strong buy recommendation. On Feb. 16, he lifted his target price to $12 from $10.

Nova, the analyst wrote in that earlier report, is strongly positioned at semiconductor foundries, a number of which are adding capacity. Profit margins were fat — gross margin was 54.9% for the fourth quarter, up 0.2 of a percentage point — and expenses were under control, Mok said.

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The analyst said that even as the company spends more on R&D and on field-support staff, profit margins on its equipment should widen and partly offset those added costs.

Nova’s price-to-earnings multiples stand at 13.9 and 9.9 for 2012 and 2013, based on Mok’s profit estimates for the respective years.

Taking a bit more conservative position on Nova is Amit Dayal at Rodman & Renshaw: The analyst affirmed a market-outperform rating and a $10 target.

The company’s foundry business is getting good support as a result of chip demand from producers of smartphones and tablet computers, the analyst wrote.

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